Corbyn and the railways: the costs of having a life-size trainset

A major part of Corbyn’s campaign to become leader of the Labour Party was the promise to re-nationalise the operation of the UK railways. Indeed, that promise became Corbyn’s very first official policy, with part of the supposed rationale being that “the public have paid £10 billions in subsidies and the operators have posted aggregate profits of £1 billion” since the railways were privatised.

Although there have been a few articles in the mainstream media that purport to examine the feasibility of re-nationalisation in terms of the costs of doing so (see, for example, here and here), these articles have, at best, been cursory and only scratched the surface.

In particular, these articles fail to examine 1) the initial costs of regaining control of the railways from private operators; and 2) the annual costs of running the railways once they have been re-nationalised. These are discussed in turn below.

The first issue of the government regaining control of the railways could be solved costlessly (in terms of government money) if a Corbyn government were willing to wait until the franchises running the railways came to a natural end. However, this approach does not seem likely for two reasons. First, the current schedule of rail franchises indicates that all will run out prior to 2020 (the first year of an hypothetical Corbyn government), such that the current Conservative government likely would re-new the franchises at lengths of around 7-10 years (as suggested by the Brown Review) means that the earliest date at which a franchise will expire under an hypothetical Corbyn government would be 2022. Second, given that the policy of re-nationalisation was the first of Corbyn’s official policies, it seems that Corbyn would be unwilling to wait particularly long to enact this policy.

Hence, Corbyn’s re-nationalisation most likely would require buying out all franchise owners. Although there do not appear to be any publicly available figures regarding how much it would cost to buy out all rail franchises, we can construct a back-of-the-envelope estimate. Using the fact that Stagecoach and Virgin paid £3.3bn for one franchise (implying that the franchisees consider a franchise to be worth at least that much), and assuming that this value is directly related to the number of passenger kilometres (i.e. the value of a passenger kilometre is the same across all franchises, then using the information provided in the Office for Rail Regulation Report here (excluding London Overground),  the total value of all rail franchises in the UK is about £38bn. This amounts to a one-off cost of roughly 3% of GDP in the year in which the Corbyn government would re-gain control of the railways.

Although that doesn’t sound too bad, there is also the second item involved in running the railways – namely, the ongoing costs (or profits) from operating them. Indeed, currently the franchises together have a profit margin of about 3% – in other words the railway operators make roughly £250 million per year as profit.

While it might be tempting to conclude that re-nationalising the railways would therefore actually make it profitable on an annual basis to do so, this would imply that it would take almost 150 years for the initial £38bn cost to be recouped by the government. That probably does not make much business sense.

Moreover, that £250 million per year figure assumes that the current prices, price increases, and levels of investment apply in future. However, isn’t the entire rationale for Corbyn wanting to re-nationalise the railways so that prices are kept lower and investment higher than they would be if the railways were not re-nationalised? Although it is difficult to put an exact figure on how much it would cost per year to achieve Corbyn’s aims of lower prices and/or higher investment levels, it is plausible that they would pretty much wipe out any current profit. In other words, the initial outlay of £38bn is unlikely to ever be recouped.

Now, whether you think that this outlay of public funds that are unlikely to ever be recouped (and that could be used for other things such as new hospitals, new schools etc. if they were not used to re-nationalise the railways) is worth having possibly (but not guaranteed) lower prices and higher investment levels, then that’s your choice. But I know where I’d rather have £38bn spent, and it’s not on taking back control of the railways.

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4 thoughts on “Corbyn and the railways: the costs of having a life-size trainset”

  1. But most reasoning for nationalising the railways is more to do with reducing fares and improving both frequency and quality service. Whilst I am as sceptical as anyone that nationalisation would have these effects, if it were to happen, then the benefit of increasing the mobility of citizens would have results far beyond these numbers. Whether just looking at the ease of doing business, flexibility of employment, or providing a far less intrusive and market manipulating measure to protect house prices than anything the government is currently trying. (I’m not generally in favour of the government trying to interfere with the housing market, but given they are so intent on doing so, it would be better to act by providing added housing value i.e. by reducing commuting costs, than by manipulative schemes that inevitably lead to a boom and bust continuation).

    Again, I’m sceptical that positive changes in service and prices would actually happen, but this surely carries more weight in the calculation than the just the costs/gains of buying and running the railways.

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    1. You make a good point – there would indeed be some wider benefits from improving the transport system, but it’s difficult to quantify these.

      Moreover, it’s plausible that they would be quite small given that much of the population is able to drive (although, of course, it would be very beneficial to those that cannot drive).

      As such, it’s difficult to see this having a non-negligible impact on a costs-benefits assessment (although I am, of course, willing to include any estimates of those benefits should such estimates exist).

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  2. First of all, I am philosophically neutral about nationalisation/privatisation of railways. I suspect that renationalisation would be neither the panacea nor catastrophe that politicians would have people believe. I think things would be pretty much business as usual in this case.

    A few quibbles though (I don’t 100% understand the franchising arrnagements so do correct where wrong):

    – As a whole, the franchises are worth a combines £38bn. Let’s say that the average franchise length is 8 years – £4.75bn/year. Train companies pay this into the public purse for the exclusive right to run train services and charge fares and also the track gets maintained for them etc. On top of this, they make a profit of £250m. This would mean that total revenue from operating trains is £5bn/year (excluding of course the cost of buying trains and paying staff, which for argument’s sake let’s say is the same in public or private ownership). So at £5bn a year, it would take 7.5 years to reach the £38bn, or in other words, about the length of the franchise – because the government isn’t paying a franchise fee to anyone!

    The real question is whether the train companies would sell back the franchise at the cost they bought them for – which of course they wouldn’t! They hopld all the aces if JC has committed to buying them. That £3.3bn Virgin one? Well, Virgin could say £5bn and he’d have to pay it.

    -Secondly, that £38bn assumes all franchises have a full 8 years remaining. One would assume that at any given point the franchises were, on average, half way through their lease. So I think the “fair buy out price” would be half of that. But, as above, would you get a “fair buyout price”? almost certainly not.

    -Given that JC is hardly known as a deficit hawk, I suspect any purchase would be made using further bond issues (don’t get me started on “People’s QE”). And actually, that’s a sensible reason for government borrowing – to acquire an asset that generates income above the cost of borrowing. I reckon they could probably be issued as sepearte notes, secured against the asset, matching the liabilities to the end of the bought out contract.

    -I would have also thought that there would have been some synergies between owning the track and the trains and from having a unified network. Much more your area than mine – it’s basically a big M&A deal, right?

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    1. On the first point – although the government isn’t paying a franchise fee to anyone, they are also not receiving a fee from anyone, so in that sense the net change as a result of the franchise fee is neutral (I did not include the “lost value of future franchise fees” in my assessment of the costs, but could extend it to do so, which would merely increase the costs of re-nationalisation).

      And I agree regarding the government potentially being held to ransom regarding the value of the franchise, although the counterpoint would be that the value of the franchise would decrease, the shorter amount of time left on the franchise agreement (which is your second point, I guess).

      On JC’s deficit “affinity”, you could well be right there. As pointed out by Simon Wren-Lewis, almost all economists agree that now is the perfect time for a government to invest, what with interest rates being really low. However, the issue here is whether re-nationalising the railways is the *best* form of investment that the government could conduct (in terms of financial, or even social, returns).

      There might well be some efficiencies from one company owning both the vertical (i.e. Network Rail) and downstream (i.e. the railways) firm. The extent to which those efficiencies matter depends on (among other things) the size of the cost of the input in the downstream product (perhaps not that large a cost for the franchises – I’m not sure there though) and the potential for the upstream supplier to “hold-up” the downstream firm (this might be the main benefit there). However, I understand that the systems that allow Network Rail to liaise with the franchises are fairly well developed, so it’s unclear exactly how much benefit vertical integration would achieve there.

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